Two important economic reports released today and yesterday suggest inflation remains an issue. April’s Producer Price Index (PPI) recorded a sharp jump to 11% from last year and yesterday’s Consumer Price Index (CPI) soared 8.3% from a year ago.
Both economic reports suggest the Fed may need to be more hawkish with its monetary policies to fight inflation in the upcoming FOMC meetings. Continued inflation and rising US interest rates have led to deep corrections and cyclical bears in stock market indexes.
S&P 500 Index (SPX) dropped 18.59% year-to-date, Dow Jones Industrial Average (INDU) declined 12.68%, New York Composite Index (NYA) fell 13.01%, Nasdaq Composite Index (COMPQ) plummeted 28.31%, Nasdaq 100 Index (NDX) collapsed 26.80%, S&P 400 Mid-cap Index (MID) sank 16.61%, and S&P 600 Small-cap Index (SML) collapsed 17.14%.
The mega-cap technology names have now come under persistent selling, suggesting recent selling may be approaching a critical stage. The ability of the large-cap names to find support at their respective supports may signal selling has come full circle. On the other hand, further selling in the large-cap technology names warns that these leadership names will begin to catch up to the declines of the rest of their peers.
Two questions warrant immediate attention. (1) If an economic recession occurs, will the current leaders such as energy, commodities, defense, select consumer staples, and utilities also succumb to strong selling? (2) If the biggest market-capitalization-weighted technology names break down, does this trigger a selloff in index-based funds, ETFs, and passive funds benchmarked to the S&P 500 Index, resulting in the capitulation phase?
Market indexes have fallen to critical support. Bulls must step up to defend these technical levels to develop potential market bottoms.
The S&P 500 Index (SPX) nears its crucial 38.2% retracement from Mar 2020-Jan 2022 at 3,815. The ability to find support here may contain the recent strong selling. Below 3,815 warns of an SPX decline toward 50% retracement at 3,505 and under severe selling to the 61.8% retracement and Sept/Oct 2020 pivotal lows at 3,195-3,234.
The Dow Jones Industrial Average (INDU) is also approaching critical support along 29,794-29,856, corresponding to the 38.2% retracement from Mar 2020-Jan 2022 rally and Jan 2021 lows.
The battered Nasdaq Composite Index (COMPQ) has already violated its 38.2% retracement (12,552) from Mar 2020-Nov 2021 rally and is now challenging the 50% retracement (11,422) and below this to 10,291-10,519.5 (61.8% retracement and the Sept 2020 lows).
The Nasdaq 100 Index (NDX) may hold the keys to an overall stock market bottom since the large-capitalization weighted technology names can influence the direction of many broad market indexes. If NDX can maintain above its 50% retracement (11,768) from the Mar 2020-Nov 2022 rally, this bodes well for a potential market bottom. Failure to find support warns of an NDX decline to 10,489-10,678 (61.8% retracement and Sept 2020 lows).